Newsletter – The National Franchise Guide: Hospitality sector: new times, new franchise formulas?

Franchise, franchise formula, franchise agreement, restyling

According to data published by the Central Bureau of Statistics in March 2015 in the Horeca Quarterly Monitor, the hotel and catering sector recorded a growth of 5.6 percent over the whole of 2014 compared to the previous year. According to data previously published by Statistics Netherlands, 2014 was even the best catering year since 2008. Reason for franchisors and franchisees in the hospitality sector to invest in updating the franchise formula? Or is that a bit more nuanced?

Due to the growth in turnover within the hospitality sector, the scope for investment is increasing. For franchisors and franchisees in the hospitality sector, the Retail Agenda published in March 2015 on the website of the central government is of interest. The Retail Agenda explicitly mentions new concepts to remain interesting for consumers, for example by means of a combination of catering and retail, a showroom, a meeting place and/or culture. To remain attractive to consumers, restyling of the catering facility could also be considered.

In the case of franchising, a new concept often means that the franchise formula has to be changed. For franchisors and franchisees, specific points for attention therefore apply to making investments that entail a change in the franchise formula.          

For example, a franchisor that wants to restyle all hospitality establishments, requiring investments from the franchisees to do so, cannot change the franchise formula if the franchise agreement does not provide for a provision or arrangement for the franchisee to follow such formula adjustments and no other basis ( for example in the context of a reorganization necessary for economic reasons) for the implementation of adjustments.  

And a franchisee can make investments that fit within the existing franchise concept, but if a franchisee, for example, would like to combine the catering facility with retail or culture – not already part of the formula – then the permission of the franchisor is required. A relevant arrangement may also be included in the franchise agreement for franchisees. 

In the absence of a contractual arrangement regarding the adjustment of a far-reaching change to the formula, it is important for franchisors and franchisees to enter into dialogue with each other about this in good time, partly in the interest of the attractiveness of the franchise formula and the uniformity to be radiated. . In practice, it appears to be a good option to open a pilot branch and, if it proves to be successful and after consultation within the franchise council or the franchise association and with sufficient support, to adjust the franchise formula.       

It is even better to include a procedure for implementing a (significant) change to the franchise formula in the franchise agreement, especially when the franchisor requires investments from the owners of the catering establishment (the franchisees). If such a contractual procedure is included in the franchise agreement, then that procedure must also be followed. It happens that franchisors do not fully follow the procedure, so that they can then be confronted with having to reverse changes to the franchise concept that have already been implemented. 

But even if a franchisor follows the entire procedure, it is also important that the interests of the franchisee, i.e. the owner of the catering establishment, are valued. Particularly important are the level of investments, the amount of investments and the consequences for the liquidity and profitability of the catering establishment. However, that does not detract from the fact that it is also in the interest of the owner of the catering establishment as a franchisee that the franchise concept remains current and attractive.

The growth in turnover in 2014 may encourage franchisors and franchisees to invest (extra) and adjust the franchise formula. In this context, it is wise to follow the procedure that may be included in the franchise agreement and to enter into a dialogue with each other.

Mr J. van de Peppel – Franchise lawyer

Ludwig & Van Dam Franchise attorneys, franchise legal advice.
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